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3 Reasons Best Buy (BBY) Is Not a Bust

I've been advising investors buy shares of
Best Buy (
BBY
)
for several months now. But last week's 30% plummet in Best Buy's
stock served as a wakeup call that this story isn't a slam
dunk.

The reason for Best Buy's decline was that nine week holiday
sales were not good; same-store revenue declined by 0.9%
year-over-year. That was very disappointing considering we were
expecting at least 2% growth.

The big picture investment thesis is that there is room in the
market for a big box type brick-and-mortar consumer electronics
store. One that offers an alternative to Wal-Mart (
WMT
), Target (
TGT
) and Amazon (
AMZN
).

A management led turnaround - focused on improving online and
mobile sales channels, customer experience, corporate efficiency,
product selection and competitive pricing - is also a major
consideration.

Holiday sales were not great, there's no denying that. But I
don't believe nine weeks of the year tells the whole story. Here
are a few reasons investors shouldn't get too worked up about
BBY's weak holiday sales and the subsequent stock crash (full
disclosure: I own BBY, and plan to buy more).

The Entire Holiday Sales Picture Is Still Unknown

BBY highlighted a competitive promotional environment leading
into the holiday. I approved of this, even though it would hurt
margins. The fact is that BBY has to compete on price because
that's part of their turnaround strategy. I don't like to see
companies set a course, then change it - I want to see follow
through.

BBY followed through this holiday season but despite their
competitiveness didn't grow sales. That suggests that they had
difficulty attracting consumers away from the competition, namely
Target (
TGT
), Wal-Mart (
WMT
) and Amazon (
AMZN
).

But, to be fair, we haven't heard holiday sales numbers from
these companies yet. So we can't make an apples-to-apples
comparison.

It may turn out that retail sales were down across the board.
Perhaps a shorter holiday shopping season did matter. And perhaps
weather was a factor. But all big retailers faced the same
environment. Right now the market believes that when the chips
were on the table, BBY played, but didn't win.

That's a definite possibility. But it's also very likely that
BBY played, but didn't lose. That's an important distinction,
especially for a company that we shouldn't expect to be a clear
winner at this early stage of the turnaround. Just being in the
mix is perfectly fine at this point.

Critical Online Sales Improve, But a Lot of Room
Left

One
bright spot for BBY
was that comparable online sales were up by 23.5% to $1.32
billion. Given the importance of online (how can you compete with
AMZN without an online presence?) this metric jumps off the page
for me. Online sales were 11.5% of total sales.

Despite this bright spot, BBY needs to step up its online
effort in a big way. And do it right now. The vast majority of
customers begin their shopping experience online, and around half
actually shop the internet while in a store. These customers
should not be allowed to leave without buying something that BBY
has in stock, especially when BBY has it at a competitive
price.

The challenge is making sure the customers know this. And that
means offering great online and mobile shopping experiences.
While online sales showed an improvement, the bottom line is that
management needs to make online and mobile a bigger priority,
right now.

Cost Cutting Initiative Making Progress

A company can't slash its way to growth. But running an
efficient business is part of the overall success package. BBY
recently slashed another $45 million in annualized costs which
brings its total annualized Renew Blue cost reduction to $550
million. The company has to get leaner before it can grow
again.

Service Levels: Improvement

BBY stated that its Net Promoter Score improved by 4%. Given
that retail is a service battle, an improvement here suggests
that BBY has some fire left. BBY has high market share in a lot
of consumer electronics categories. This means that many
customers are theirs to lose.

The Bottom Line

Holiday sales were not good. But I still believe there is room
for a bricks-and-mortar consumer electronics store, especially as
devices become more interconnected and consumers desire to see,
feel and discuss (in person) various product attributes.

I see no reason why BBY can't fill that slot and compete with
TGT, WMT, AMZN and COST, especially given that it's partnerships
with vendors (Apple, Google, Microsoft, etc.) differentiate the
shopping experience.

Yes the company has a lot of room to improve, both in store
and online. But that's why this is a turnaround story, and not a
growth story. The turnaround isn't yet complete. My advice is
that if you don't yet own any BBY, now is a good time to start
buying. Just be prepared to hold for years, not months, to earn
your reward.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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